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tonight on "the kudlow report" -- do large budget deficits drive up interest rates? everyone thinks they do, but the facts suggest there little relationship between deficit civ rates. we'll show you why it is really inflation that drives rate, not budget deficits. and, the government pay boom, once more into the breach, government workers make 45% more in total compensation than private workers do. 34% better salaries, 118% more generous health benefits, and 595% better pensions. it's union government workers driving this. and it is a total outrage. and, oh, by the way, 2000 house staffers make six-figure salaries, and you, the taxpayer, are funding it. i bet you didn't know that! rising democrat star,

senator mark warner of virginia, tells me in an exclusive interview, that too big to fail bailout nation is going to be history. finally, a free-market reform let us hope! and i think we need more home foreclosures, not fewer, in order to solve the housing problem. fasten your seat belts, everybody. "the kudlow report" begins right now. good evening, everyone. i'm larry kudlow. welcome back to "the kudlow report" where we believe free-market capitalism is the best path to prosperity. let's have some fun. begin my thoughts with money politic, news of the day. treasury rates jumped this week as the ten-year bond moved up to about 385%. maybe 20 basis points or so in the last couple of weeks. former fed head alan greenspan calls this the canary in the coal mine.

he blames budget deficits and the huge overhang of federal debt. ask anybody in the money business, including the bulk of the investor class, and they'll tell you that budget deficits drive up interest rates. so, i'm here to tell you that's wrong. it may seem reasonable, but it's still wrong. this deficit cause high interest rate theory embraced by greenspan, and this is past by dave stockman during the reagan years and robert rubin during the clinton years has no statistical basis, in fact. actually one could make the case that higher deficits are consistent with declining interest rates because the worst deficit numbers typically occur when the economy is in recession and there is no private credit demand. and during economic recoveries, deficits shrink as tax revenues come pouring in but that's when interest rates rise during the expansion. and real investment returns improve. the real cause of high interest rates, inflation.

if prices are rising, then investors demand higher interest rates, as inflation premiums, that compensates for their money value loss. basically, long-term interest rates fell from 1980 all the way through 2009. 30 years as the inflation rate dropped from 14% to roughly 0%. that's 30 years as deficits went up and down and up and down, rates continue to fall. and let me add right here on the inflation point, a stabile king dollar holds down inflation. that is a much more powerful tool for interest rates than business cycle swings in the budget deficit. and oh, by the way, deficit interest rate mongers fall into a tax hike trap. the real issue for holding back deficits over the long run is not to raise taxes, but to curb excessive federal spending, and, in fact, to keep marginal tax rates low enough to spur

incentives for economic growth producing tax revenues. in other words, the laugher curve. lower tax rates mean a stronger economy, a tronger economy means more tax revenues and more tax revenues means lower deficits. then, keep king dollar intact to hold back the inflationary tide. the real problem here is federal spending. not taxes. so if you want to be cool at your next cocktail party, when someone saunters up to you and wisely proclaims that interest rates are going to blow skyhigh because of bad budget deficits, you can calmly chop that argument down by using this editorial, which will be posted on cnbc.com, as they all are. and you'll be the smartest person in the entire cocktail party. think about that. now, let's turn to our ace deficit monger michael pinto.

he's the senior market strategistst delta global advisers. and then let's turn to our incite investor guru. who is going to chop pento down just like you will chop them down at cocktail parties. good evening, gentle men. mr. pento, good to see you, buddy. start with john rutledge. how many times in the past have we heard that this deficit drives up interest rate's arguments which leads it a big tax increase trap. why is it wrong, john? >> it's great marketing for tax increases which is the worst remedy right now. last i -- first time i heard them, larry, was in 1981, when the street was arguing that there would be big budget deficit, wouldn't be enough savings so the rates would go up from their 20% levels then. and now of course there zero instead of 20. and it isn't the in the deficit. in historic yamranges the deficit doesn't matter. inflation's more important.

it goes like this. there's a flow of funds argument, that says the deficit means the government's selling new securities and with the government sells a love new securities, if there's not enough people saving enough to buy them the rates go up. but there's another story, yesterday people in america owned almost $200 trillion worth of estimates that are already there. what really matters is the price of the assets, not the new assets, because there are probably 20 times more of them. and that's why inflation is important because inflation increases the return on real goods, like real estate and gold and commodities and draws people's portfolios toward that, forces them to sell their old bonds and drives the rates up. >> i've got a couple of charts i want to put on the screen. let's look at the deficit chart first, if we can pull that up. had is just for the last dozen or so years if we can get it up on the full screen. there you go. that starts in the late '90s. you can see the budget deficit, the ten-year yield went up a

little bit, then the deficit rises, and then the ten-year yield comes down a little bit, and then we come into this terrible recession, where the deficit explodes up to 10% in gdp. but guess what? the ten-year yield comes down, at first to about 2%, and now it's about 3. 0%. the second chart shows the clear relationship that john rutledge and i describe, inflation and the ten-year yield. take a look at that, over 30 years as inflation continued to decline, so did long-term interest rates. and i want to add one other point before we let michael pento get some equal time because he is a manic deficit hawk. japan has worst deficits than we do, in fact the japanese debt to gdp ratio i think is something like 150%. we're at about 80%. now we may be rise, i'm not here to condone the deficits in the debt but japan's long-term interest rate is 1.38%. actually significantly lower than oudespite fact that they

have a much worst deficit problem. so michael pento, do you really believe -- >> yes, i do. >> -- in your heart that deficits drive up interest rates. >> i do. >> despite all offul empirical evidence and the charts. >> all of the empirical evidence. >> all of the empirical evidence. >> i think that you have to ignore history and markets that deficits does not matter. i mean you mentioned japan. they have a huge saving's rate and aging population and declining population and a ruined banking system, zombie banking system. they have deflationary sources. >> right. >> but you have ignored. >> that's the key. >> bosnia. >> you just said it. >> georgia. greece. >> japan has huge deflationary forces now that play it is into argument. >> right. >> it is inflation or desfliegz right. >> that drives interest rates now the budget deficit. >> but when you have a massive increased in deficits in debt and the central bank is sometimes colonel pelled to keep deficit it's. >> there you go. >> -- under control and to keep debt service manageable, if they start printing up money and monetizing the debt which i'm very much afraid that is the path we're headed down.

>> bingo. we're all on the same page here. >> -- you're going to get inflation and high are rates. >> yeah but lots to a different issue. >> no it's not. >> yes, it is. >> correlated. >> what pento's saying it is inflation that matter, john, not the deficit. >> absolutely. >> and by the way comparing bosnia to the united states, we don't operate same way. notice, john, what is your reaction to what mr. pento's just said? >> first of all, larry, you're correct we don't because bosnia has better tax policy than we do and better fiscal policy than we do but i think -- i think michael -- michael is very much right on this point that if you have big increases in debt, the u.s. is going outside the historical range right now for the u.s. and the fed in the last year's increased bank reserves by 1200%. clearly the big risk here is that the fed gets political pressure in order to try to keep the rates down and they inflate the economy because of that. but that's the political pressure on the fed. and that's the fed caving, doing that. it's not the mechanics of selling deficits into the bond

market. the bond market is dominated by whether people want the bonds they owned yesterday and i agree. i think all of us three agree that what matters there is what signals they're getting about monetary policy. and unfortunately we're getting very bad ones right now. >> well, i don't know that. >> legislation allows the president to essentially pick the federal reserve board leaders now. >> but, what? here's the thing the dollar is going up, mr. pento. and the gold price has gone down. and the rising dollar, it's up about 10% or 12%. it's most interesting developments since early zmt dollar's going up and it's going up against the weakened euro because of their debt problem, yes. and it's also going up against the japanese yen. >> yes. >> and that's a significant. so i want to take the other side this. put deficit aside i don't think that bernanke will monetize the debt. i don't think that he will, but you can argue that. the fact is that the strong dollar is an indicator that, at least in the near term, that ain't no inflation, none, zippo. >> well, year-over-year

inflation is 2.1% so let's just talk -- >> it hasn't moved. had hasn't done anything. >> let me tackle one of your issues one at a time so that we can go through it nicely. okay, right now, commercial banks own more treasuries than ever before in the history me right. >> so, bernanke is using these commercial banks to monetize the debt. they're just using them as a condco condu conduit. >> excuse me. >> that does not create. the fact that the banks are buying the debt -- the banks cannot create new money, only the fed can create new money. >> but fed creates new money and those excess reserves are buying to deploy treasuries. >> and? >> so that's a very unhealthy way to grow the money supply. >> wait the money supply not growing. >> and up year over year. >> two is flat. >> the shadow banking u.s. >> and excess reserves lying fallow at the federal reserve. >> that is true. >> the multipleier. i acknowledge that over time the fed's balance sheet could turn

into rapid money and inflation but we don't know that. here's what we know. the dollar is rising. i know you hate this, but the dollar is rising. >> okay. >> that tells me we have deflationary pressures in the last few months. >> and you broke my heart. i haven't been on this show for a few weeks and i think that you need me on the show because i have to bring you back -- >> looking at dollar. it's king dollar return. >> larry, is the dollar rising or is the euro falling? and let me ask you this? >> what's the difference this is. >> what is the difference? >> you have -- >> because the dollar's rising against the yen also. >> ben bernanke -- okay, let's just -- >> and canada. and australia. >> that's true. >> how do you explain that? >> very recently a change against the aussie dollar and canadian dollar. >> that's what i'm talking about. >> most the move is against the european currency. yes? >> and not one darn thing that you can say the u.s. government has done to strengthen our currency. the federal reserve. >> always better -- >> the chairman of the federal -- the balance she was the federal reserve now at a record high 2.23 trillion.

>> the money has not put to work. >> have not moved on the interest rates so the intrinsic nature of the dollar has not changed. i'm 5'6". if i walk into a room full dwarves i will look like a very tall person. >> ronald reagan taught me it may be better lucky than smart. bernanke who should probably go to greece and the partenon and kneel down in gratitude for fa that fact that the strengthen's strength the because greece's pulling down the euro. i want to go to john rut ledge on this, john i may disagree on you on this. i think that u.s. recovery is coming on stream. i think saw today's profit numbers from the gdp report were up 30% year on year in i.r.s.-related corporate profits. that's a great measure. i believe after tax, up 21%. and i think ben bernanke has been saber rattling that the fed is willing to sell their bonds to drain cash when the time

comes. so the dollar may be rising for a whole bunch of reasons. some which are quite positive but in any case it tells me, yeah, interest rates are going to go up some, but i don't see this big inflation, john. >> clearly there's pressure -- pressure on prices is not to inflate them right notice. the pressure extent, in the companies is for falling prices. >> yep. >> not rising prices. >> yep. >> but it is a fact that the fed has already monetizeding. >> thank you. >> they've increased bank reserves by 1200%. doubled the monetary base, there are reasons that that's not yet squeezed out into monetary aggregates. don't believe that bernanke and the market committee. i think that there is a massive drop in the dollar already baked in to the fed's activities unless they pull a hell mary that they've never done before in history. so. >> that was the view. >> that would be a great

indicator of rising inflation. >> the dollar fell for the last six, seven months of 2009. going into the new year, all the smart money was betting against the dollar and in favor of gold. what's happened is 180-degrees' different. the dollar's increased, gold's gone down. >> not much though, lare, right? come on. $100 ounce off of its all-time high. >> i understand. >> in nominial sneerms but you were a bond on gold. >> i am. >> you were a bear on the did. the dollar's gone up, not down. you see -- >> i've been a bull on gold for ten years. >> is it? >> it's gone down. >> maybe a change here that's the point i'm making. >> i will say this -- >> i want to go back to the point that the deficits themselves -- we're a little off of the subject here. >> yeah, we are. >> deficits themselves do not drive interest rates. >> okay. >> inflation. you guys are going to bet on higher inflation to drive up interest rates. but that's different than the deficit. >> i completely -- allowing

people to talk you into higher tax rates with the deficit argument is a terrible, terrible idea. don't buy that story. >> that's for spending cut and you know that the dest sits went from 2% gdp and now 10.6 of gdp. if you increase the supply of treasuries dramatically, you're going to have to increase the yield to attract buyers. and if you keep telling chin that we're going to enter into a trade war that we don't give a dam bn deficits watch the dollar fall and watch treasury yields soar. >> that might be, by the way i think that the dollar will fall against the chinese yuan. i think that the chinese yuan may float up. back to this issue democrats love to point at the deficits, where mike pento aligns himself with the party of big government. >> the tea party you mean. >> yeah i know but if you obsess about deficits then you can obsess about rising taxes. isn't the deficit argument been used to club the laffer curve and those who believe in supply economics, john. they always told us in the '80s that the tax costs would cause

deficits to go up, deficits in fact went down and interest rates went down too and inflation went down too. they will make the same case, aren't they, in the next few years, they will try to have a national value added tax, do all kinds of things. they won't cut spending. isn't that where the deficit argument leads? >> they're already doing it. look, we had a massive tax increase just this last week with the health care bill. we've also knot our old friend greenspan and others talking about why it's a great idea to have a consumption tax. but basically when you raise tax rates you're reducing the growth of the economy and reducing the cash flow we need in order to pay the coupons on those debts and pay our taxes. that's a terrible idea. >> and when you tax labor you get less of it. when you tax labor you get less of it and any money that you raise gets redistributed in the most inefficient manner. we're on the same page. i am for cutting spending to balance the sfwhooj you are right. >> the not raise taxes. >> in the next three months, is the dollar going up or down? >> against what?

against hard assets, i have my doubts pidon't think so. against the euro, yes, maybe. >> all right, and against -- >> and against the yuan. don't you think, larry from 74 to 82? >> i don't know. i don't know. i think it is one of the most interesting surprises and hear to tell you that real returns to the american economy with profits hire boosting the dollar, along with the euro problem, and that's what you're missing. and that keeps inflation -- did you see how the inflation reports -- >> yes, i did. >> -- fell in february? >> i will tell you -- >> do you think that more are coming. >> i think that ben bernanke cannot bail out greece forever. >> is the dollar going up or down. >> i believe it will go up but my portfolio i am short the long treasury. i own coal. i own copper. i own commodities. because i think the growth of china, the return of the u.s. and the 1200% in the fed's balance sheet are all going to drive commodity prices higher.

>> all right i'm here to say from the kudlow vantage point that if king dollar continues and i believe it will, as the u.s. economy continues to grow, and by the way, the jobs numbers a week from tonight are going to be stronger than people think, that means gold is going down, commodities are going down, and you should be, john, in consumer-related stoksz, you should be retail stocks. >> i believe go up for that same reason because we're going to have growth and the growth is driven by china and today's stock market is exactly the milk carton child for what i'm talking about with bhp and freeport-mcmoran and the like, up because of this growth. >> all right. and your point? where would you buy now? >> i am also short the long-end of the treasury curve. >> right treasury rates will go up. >> i think that yields will go up, much higher. >> and what about the commodities? >> i bought back half of my position they sold in november in commodities and when gentle banner, banana ben, returns to q3 i will buy the other half. >> i hate to boat bernanke but i

tell you what right this second i'm betting on a strong king there. my mike pento, thank you very much. john rutledge, thank you very much. the eyes have it. deficits do not drive up interest rates the real issue inflation. and i think in the short end they'll be wrong. coming up a rising democratic star. that being senator mark warner of virginia. he tells me in an exclusive interview on cnbc that too big to fail bailout nation is going to the dust pin of history. we're finally going to get a free-market refoam. we'll hear from him in just a minute. >> the core of this is making sure that we end the too big to fail.

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all right welcome back. i spoke exclusively earlier today with freshman virginia democratic senator mark warner. a short while ago he is a

risings star in the democratic party. he is also very deeply involved in financial regulation, and wants to terminate too big to fail. take a listen to his interesting views. >> let me ask you, somebody myself's been a supporter of senator dodd's process to end too big to fail. let me go to sheila's criticism which was echoed by senator richard shelby. mr. baer was worried that the current allows if air "backdoor bailout," meaning, i guess, that the fdic and the treasury can apply debt and loan guarantees but not go into receivership or bankruptcy. are worried that that shows we're not ending too big to fail. do you have a thought on that? >> absolutely, larry. first of all, you know the fed program, any lending they do has to be not specific to an

individual entity. it can only be for solvent firms not insolvent firms. the fdic approach if they want to come up for the loan program they have to come back up to congress to get approved and frankly what we've put boplace are a whole lot of speed bumps for any of these large firms in the first place. higher capital requirement, liquidity requirement, making sure they actually have to have a plan that gets blessed by the regulators that shows how they can unwind so they're not only -- some of these firms try to be too cute to fail to make themselves so interconnected they can't have fail. they need a plan that gets blessed on the front-end. and we've got got a strong preference for bankruptcy. the normal process. god forbid we get into resolution. we'll guarantee if you go into resolution your firm's not coming up, you're going into receivership and not conservatorship and any rational management team or group of stockholders will not -- >> you know that was sort my impression --

>> absolutely. >> when i first read the senator dodd fact sheet and so forth. will the language, tightened? in other words when sheila bair might this criticism of the backdoor bailout and again senator shelby's concerned about that, mr. dodd issued a press release saying, the language would be tightened to move it into the direction you just said, resolution or bankruptcy. has that language been tightened? on well, larry, that's period of time -- that's part of what we're going to go through. no policy difference. we want to make sure that the taxpayer's never on the hook again by bad decisions by the guys on wall street. can you predict every eventuality absolutely not but come up with the premise that psz bankruptcy's the preferred route, matter of fact we even put a judicial check in place so if somebody in an administration in the future you know ever wanted to prefer resolution at least a judicial check there. if you end up going resolution though, you're toast. you're shareholders will be wiped up, your management's going to be wiped out and make

sure if any exposure on the back end that exposure's picked up by the industry and not the taxpayer. >> thank you for that. there's another criticism that the fed in its emergency lending under so-called rule 13 tleesh whatever it's called, that the fed can open up the discount window provide emergency funds and that that would bailout the banks, that that would bailout a failed institution and prevent them from going into bankruptcy. do where do we stand on the fed's emergencying lend. >> 133 i think some additional tightening. i think that's what we're looking at but remember that the fed can only lend to solvent firms and a much more transparent audit trail after the fact that the gao come in and look at this so not the some kind of slight of hand that may have taken place in the past. you are will have to to show it's a solve ept firm and an audit trail. and a way to tighten up on 1303 we'll take a look at it.

>> the $150 billion bank assessment people are saying that's a slush fund to keep banks afloat and do whatever's going to be done with it. other people say -- or this is my thought, is that it's sort of debtor in possession fund to provide a safety net for moving through bankruptcy. >> larry, you're dod. it is exactly the frame we're looking at. debtor in possession financing to keep the lights on until the fdic can make an assessment the real money come about to help get through a resolution will be the ability for the fdic to borrow against 90% of the unencumbered ascitizen but you don't need the government rushing and making some shorthanded decisions because they've got a 24-hour window to close outsed. the $50 billion fund funded by the financial institutions not fund by the taxpayer gives you a little bit of a operating capital cushion but since this funding is going to go in as debtor possession much to the food chain ahead of everybody else, clearly it'll be recouped

and recoup from industry so the alternative of those who say -- and we can maybe make this fund a little bit smaller if there's a business case to be made but if you get rid of it entirely what you end up with is either the government making an ill-informed decision in terms of how much money they can borrow against -- in terms of unemcumbered assets or you've got potentially taxpayers involved in the short term funding this kind of operating capital shortfall. >> well i always saw it as the debtor in possession. a lot of misunderstandings about this. i mean do you have to keep them afloat even while they're in bankruptcy. >> absolutely. you've got to have that bridge financing, but remember if you've got the process that's going to lead you towards receivership that's going to put you out of business and if you've then got the ability for the fdic -- you know if it's a large firm by nature, it will be, to borrow against the unencumbered assets of the overall holding company that's where the real dough will come from but make sure dwloouf got some short term. could that number be different

than 50? that's a legitimate conversation to have but for somebody to say this is a bailout slush fund valley a lack of understanding of how these large firmsed go through a resolution process. >> this is music to my ears because i've been supportive of this whole dollar process. >> i know that you have and i think that folks are looking -- you know too big to fail is where the hot button is and consumer's kind of like the public option in health care. it's important, but really the core of this is making sure we end too big to fail, that we put the fear of god into wall street to make sure that they doan have the got bail them out and ways to improve it we'll have it but i think that we've taken a giant step forward. >> i've gotten killed by my conservative colleagues. i am glad hear your point of view. a couple of other short one, sir. >> sure. >> the consumer protection piece, standalone or will it be connected to the fed or another banking regulator? my friend elizabeth warren she's a great lady but some people thinks that she needs some sort of adult supervision when we do

this consumer protection sniebs think at the end of the day the consumer protectionary will be connected to some existing entity. you know at first i didn't think the fed was the right place, the more i thought about, it -- actually the fed is probably as good of a place as any. and you think from the consumer side the fact that it will have independent funding, that it'll have an independent share, that it'll have some rulemake ability you do want to make sure that you end up not giving contradictory advice, particularly the smaller banks, where one day you've gate consumer regulator in, the next day you've got your prudential regulator in, you need to give you know, unified consistent advice and i think pairing it with an already existing entity makes some sense. >> and one last one on this subject. you've been very involveid think with senator judd gregg and issues of what do about these complex derivative securities. can you give us a state of play on that. >> again one of the areas where there's really not a policy difference. most of us agree for legitimate industrial end users hedging is an appropriate tool to map out

their business risks. you don't want an investment bank to come in and buy you know some small airline carrier and be able to use that as a way to gain the whole system, but driving that industrial use exemption in a way that's appropriate, you know, you've got to get into the weeds because the weeds are where bengals of dollars are at and you've also got to make sure, i think, one of the areas where senator jack reed's done i think done great work is for saying those markets where you've got enough standardized contracts not only to look at a clearing function but to try to push as many of those contracts as possible to an exchange so there's much greater transparency. but getting that industrial end-user exemption written the right way is where the rubber hits the road. i don't think a policy difference but some difference in the weeds. >> all right one last of one. >> sure. >> i can't resist the political question. i don't want to talk about the weeds of health care, everybody's kind of fed up with that, we've already done that. >> amen. >> ask you this, politically, look, you've always been a moderate. people regard you as aa pro-business mod not have a yep. >> you yourself were in business

before you came to politics. >> yep. >> a tough article in "the wall street journal" yesterday by my friend dan haniger said the following that with the passage of obamacare the democrats have now reverted back to the pre-clinton. they are the party of government, big government. and the returns who voted against it are the party of the private sector and free enterprise. and that the country's going to revolt and punish the democrats come november. your thought on this, senator warner? >> well, listen i don't think that's the case. i think the health care reform, you know, there's a lot of good in it, there's a lot of problems in it. but what it will do is it will shock the system and if the democrat's predictions of what happens comes out, great. if the republican's predictions come out, we're going to have to come back and fix it. remember, where we were -- where this debate was last fall when there was a question about a public option, there's no public option. most of this is still going to be driven through the private health care system. what i want to try to work with, i've already started talking to my republican colleagues, we

have to hone in, probably not this year, but hone in price containment. we need a lot more data mining. really change the whole fee-for-service basis. our whole financing around health care is broken i want to roll up my sleeves and keep working on. >> do you think that the medicare tax on investors which is really controversial and unpopular on wall street, is that thing amendable down through the years? it doesn't kick in for three years. >> listen, i think that that was a -- a way to kind of get us across the finish line and a way that lowers the deficit. i do think there's -- i think there's more to be said around that issue in terms of when -- when there's a look at capital gains. i think we, frankly, need a whole fresh look at our whole business tax structure in a way and i've got some ideas on that that i hope i'll be able to come back and talk to you about, larry. to make ourselves way more c competitive against other companies in the world. >> i know that you've been throwing all-nighters all week.

very kind to give us a friday meeting. we appreciate it. i hope to ve visit with you before too long. >> you got it, thanks, man. >> i just think senator mark warner, democrat of virginia, this guy is a rising star. he was in business before he went to politics. he was a good governor of virginia, he's a constructive senator. i think this guy is a rising star. he's got a lot of good ideas. he certainly understands too big to fail and you can hear he'd like to rewrite the tax code to make us more competitive. stop taxing investment and as he said himself, he'll revisit with us, his own tax reform plan. i just think the world of this guy. democrat mark warner, senator from virginia. all right, coming up on "the kudlow report" -- the obama administration announced their new big mortgage bailout plan today. me, i think it's all wrong. i think we need more home foreclosures, more home foreclosures, not fewer in order to solve the housing problem. "the wall street journal" steve moore is going to help me drill down on this. i tell you these fig leafs

rewarding bad behavior is such a terrible idea, it'll prolong the agony. stay with us.

all right more on the new obama plan. they want to expand foreclosure prevention. they want banks to reduce the balance for the unemployed and they want the fha to take a larger, larger role. i want to bring in steve moore

"wall street journal." because, steve, look the intentions here may be good as they always are in government but if you ask me, we are rewarding the irresponsible and penalizing the responsible. and the interesting thing is all these foreclosure moratorium schemes that obama's unveiled a story running today that 50% of the modifications default anyway, we're spending $75 billion, for what? why not let the marketplace work, steve. >> well you put it very well, larry, and i would go back to the old concept of, a, fairness? how is it fair for american's incomes have fallen. everyone's got hitten hard by this recession but most americans 90% are paying their mortgages on time. sometimes it's a big financial sacrifice do it. why should they then have to pay a second mortgage on somebody who didn't -- who isn't paying their mortgage and took excessive risk? you know this isn't just a bailout, as i look at the program, larry, eisen spent all afternoon writing about this, it's not just a bailout of

homeowners and also a big bailout for the banks who made these bad loans in the first place. as i look at it about $20 billion of -- another bailout of banks on much to the t.a.r.p. program. so i think it's unfair and i think you make a very good point. we've lived through before. we found that about half of the people who we bailed out, in terms of the homeowners, and we basically let them reset their mortgage, we find out six months later they can't pay their mortgage again. >> the other thing is, look, when you look at places where foreclosures have run unimpeded and i'm thinking of southern california and florida. the foreclosure volumes were greater. but the prices fell faster and harder. 40%, 50%. now what's happened a year later is sales are booming. now people and new families are coming in to purchase the foreclosured real estate, steve. what is wrong with that? if you ask me we need more foreclosures to solve the housing problem, not government interfering with marketplace. >> yeah you know i look at that florida market right now in places like tampa and naples i

want to buy a house there. >> right. >> it's unbelievable the mortgage that you can get. >> right. >> i think it gets to the point that, look, what was the -- what was the springboard for this recession? it was the real estate crisis. we've never allowed to happen in my opinion, the reason i think that this recession has lingered on, is we won't let the housing market reach a bottom. so that it can then climb out of the problem and so i agree with you. i think let's let the market clear, because look, these losses that have incurred from the bad mortgages, somebody has to bear the loss, right? and the question is, should it be the banks, or should it be the people who took out bad mortgages in the first place or the taxpayer? >> you know i don't want anybody to pay for my mistakes. >> that's right. >> and i don't want to pay for your mistakes. i think that these loan modifications, these foreclosure moratoriums, the tax credit chis call the national realtor's tax credit, this stuff has stopped recovery or slowed recovery or impeded recovery. it's a great example of why market forces are the answer,

not government action. i mean i think that's bottom line steve moore, hang with me tax about corporate tax too. tapp tapp ju at&t just declared a tax write-down. caterpillar, deere, at&t today, verizon, and we're going to so-called prescription drug loophole in the obamacare. why do they hate profits? let's revisit with steve moore on this very question.

all right, the white house is fighting back against at&t, caterpillar, deere and a lot of other corporations in the closing so-called prescription drug loophole from the obamacare bill. now interestingly, a post from white house commerce secretary gary lock. i've got steve moore still with me. stevish want to give locke equal time on had. he's saying with at&t announcing a billion dollar write-down. coming out of their profit but he says the following the loophole, a loophole in the prescription drug law. he calls it a loophole, which allowed businesses to deduct the value of the subsidy twice. in other words they get subsidized for extending prescription drug coverage to their retirees, but he said, they can exclude the 28% subsidy

from their income and at the same time, use it as a tax deduction. now, he's saying that loophole should be closed. what's your response to this? >> look, he may be right about that. i think it's missing the big picture here. the big story of what's happened in four, five days since obamacare was passed in the senate and house and now signed into law is that you've got these companies coming out of the woodwork, larry, basically saying that their premiums are going to rise and you know what i call that, larry, an antistimant antistimulus bill. it's basically taking money out of coffers of businesses that we need for investment. by the way it raises the cost of labor, right? so it's going to have a negative effect on unemployment. i think that the big picture, i predict to you, larry, over the course of the next three months we're going to see more businesses declare what caterpillar, deere and these other companies that have come to realize was that this increases the cost their health care plans. that's bad news for employment. >> i agree with that and i know

that the obama white house is hostile to business, they're hostile to capital and they're hostile to profits. okay, that's been my view from day one. bow this particular point, the double subsidies, the double tax subsidy. you think that locke has a point and what i want to ask you is, with tropthese corporations they're writing down now their income and it will hit their profitability. are they expensing the increased cost of health care? you mentioned the premiums. i don't see the premiums. they're blaming on the prescription drug tax break. theres a difference there. i agree with you the premiums are going up but it seems like this prescription drug tax break is what they're really marking down. >> well, i think that's right and i think that the administration probably has a legitimate point here but it's important for people to realize why it is that these premiums likely to rise because what you're going to get with these insurance policies is as more sick people enter the pools it

rises the -- it raises the cost of the average premium that peep have to pay. >> and they will still have to finance the drugs for their retirees, is that correct? >> yes that is true. >> no way they could cut back on that under this legislation? oomjust asking that question. >> no there's foe way they can get around that cost, they're already embedded into the cost structure of these -- of these businesses. look, i just don't see how this can possibly be good for jobs when you're adding all these additional costs on business. it gets to a point that i've made so many times on this show with many people like robert reisch. why doe we keep businesses like every atm machines? it's unemployment, it's the european model and leads to a pervasive 10% unemployment rate. >> i will say when the republicans passed this prescription drug coverage and gave these corporations what amounts to a double tax subsidy the smarter thing would strob cut the business tax rate from 35% to 25% or 20%. >> no question about it. >> we wouldn't be in this box

and then they wouldn't have to have a rebound and take their profits out. that was the stupidity of that prescription drug bill and i can't wait to slash the tax business rate. steve, out of time. thank you very much. have a great weekend. >> you too. coming up the government pay boom, okay, another bad bon2000 house staffers are making six-figure salaries. the government under new bureau of labor statistics is so far the unions and the government are making so much more money than their equivalents in the private sector. we're going to have dan mitchell with the cato institute walk through it with me. this is another utrage. you, the taxpayers, are paying for these massive government salaries. it's an outrage.

once more into the breach i want to raise this outrageous subject of government pay boom. government pay boom. government workers make 45% more in total compensation than private workers do even though the government has better job security. 34% higher salaries. 118% more generous health benefits. and 595% better pensions. union government workers are driving this, and you the taxpayers are paying for it. let's talk to dan mitchell the the kato institute.

dan, we're a little short of time but you know what it's interesting in this "the wall street journal" editorial from the new bur over labor statistic's number, dan. if we had equivalence between the government union pay and private pay we would cut about 40% of the entire budget deficit of the states and cities around the country. that is incredible to me. >> well, first of all, the 45% that's just the premium that state and local government bureaucrats get. federal government bureaucrats are paid almost twice as much when you include the fringe benefits. and this is very bad, not only for budgets but academic research shows it's bad for economic growth because you distort the pace structure and the economy. >> now look it, there's another -- a sidebar story that something like 2000 hill staffers are making six-figure incomes. all right, you know what, yeah that sounds bad. i don't know whether that's bad or not. i have no idea. some those kids only make $30,000 a year. to me this is the big thing.

this is the big thing. as we know we're in dire straits. the public union, dan, they're bleeding us to death. take a whack at that. that's my biggest concern. they're bleeding us to death. >> first of all as a former hill staffer let me just say that the real problem on the hill isn't so much that their salaries are too high and clearly out whack with real people in the real world we have too many people on the hill but the unions are driving overall federal pay and state and local pay out of whack. it's why california and illinois are going to become the greece of america. >> all right that's the key point. we could cut these deficits across the board. dan, i'm sorry we didn't have much more time. but at least we got those numbers out. i'll be right back with the last word. hey can i play with the toys ?

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